Question
January 27, 2004
HAND DELIVERY
Mr.Michael Verne
Compliance Specialist
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
Washington, DC 20580
Re:Balance Sheet based upon Payment of Extra-Ordinary Dividend
DearMr. Verne:
Pursuant to our telephone conversation of January 8, 20041 have preparedthis letter to memorialize the facts presented to you and to confirm youropinion on how the Premerger Office would analyze a parties' actions to reducethe assets found in the acquired person's balance sheet and thereby fail the HSR "size-of-theperson" test.
F ACTS:
Company Aintends to acquire 100 percent of either the voting stock or the assets ofCompany B, w 'c h is not engaged in manufacturing. Company B has a large amountof cash, a corporate aircraft and other assets not deemed by management ofCompany B to be required for the operations o its core business. Company B maydeclare and pay an extra-ordinary dividend (cash and non-c cash) to itsshareholders resulting in Company B having less than $10 million in assets asreflect on its next regularly prepared balance sheet, which will be prepared bythe time of the closing. There is nothing precluding the shareholders ofCompany B from leasing to Company A based ed on arm's length basis some of the noncashassets distributed in the extraordinary dividend.
Company B'sbalance sheet for many years has normally been prepared on a fiscal year basisending the last day of February each year. In 2003, Company B elected to betaxed as an S corporation under 1361 of the Internal Revenue Code andtherefore consistent with applicable tax regulations adopted a December 31 taxyear end. However, Company B will continue to prepare on a regular basis, alast day of February fiscal year end balance sheet. Continuing the preparationof such a consistent fiscal year balance sheet will enable management tocompare financial result with prior years.
ANALYSIS
For aproposed transaction valued in excess of $50 million and up to and including$200 million to be reportable under the HSR Act, the parties to the proposed transaction must meet the"size-of-person" est. In this regard, if an acquiring person has over$100 million in assets or sales and it intends to acquire the voting stock orassets of a person not engaged in manufacturing, a acquired person must have atleast $10 million in assets as shown on its last regularly prepare balancesheet. Opinion number 195 of the Premerger Notification and Practice Manual2003 edition) provides a question submitted to the Premerger Notification Office("PNO")inquiring whether a problem arises where shortly before it is to be acquiredthe acquired person `declares an extraordinary (and accelerated) dividend thatreduces its size below $10 million on its next regularly prepared balancesheet, which is prepared by the time of closing".
The PNO analysis in Opinion195 states that it does not view this as a device for avoidance and that the HSR rules of practice instructsthat the size of a person is to be determined by re erring to its financialstatements prepared in accordance with the accounting principles normally used;and, if the statements have been prepared on a regularly prepared basis inaccordance w' the person's normal accounting practices and show that the persondoes not satisfy the relevant size-of-person test the proposed transactionwould not be reportable.
DISCUSSION:
In ourconversation, I noted that the PNO's analysis in opinion 195 reverses the viewpoint presentedpreviously in opinion number 215 published in the 1991 edition of the PremergerNotification and Practice Manual. In that opinion, based on a memorandum dated January 23, 1979 , the PNO felt that anextraordinary dividend declared shortly before the transaction to reduce theperson's size and thereby fail the size-of-person test would raise avoidanceissue under section 801.90 of the rules. You stated that many of the olderopinions in the 1991 edition have been reversed in the new edition of thePremerger Notification and Practice Manual (2003 edition) and that you had"no problem with opinion 195". Additionally, you noted that a size ofa person is its size even though the extra-ordinary dividend was created tofail the size-of-person test and was created at the request of the acquiringperson.
In regardto the issuance of a balance sheet on a calendar year basis for tax purposes,it is your view that is does not preclude Company B from issuing its regularlyprepared balance sheet reflecting fiscal year as it has done for numerous yearsin the past. We note that Company B's management needs such a financialstatement for management and financial comparison purposes. Thus, the fiscalyear statements continue to be regularly prepared financial statements becausethey will be prepared at the same time and in the same manner in the future asthey have been prepared i the past.
CONCLUSION:
Theissuance of the extra-ordinary dividend (cash and non-cash) does not raiseavoidance issues under section 801.90 of the rules even though the issuance ofthe dividend occurs shortly before a proposed transaction results in thefailure of the acquired person to meet the HSR "size-of-person" test. The continuation of theissuance of balance sheets on a fiscal year basis, to be used for managementand financial comparison purposes, is considered to be the creation ofregularly prepared balance sheets even though Company B has changed to acalendar year basis for tax purposes.
If theabove analysis is incorrect, please telephone me at to discuss the matter.Thank you for your time and consideration in this matter.